Business Disclosure & Drafting
Texas Lawyer
A disclosure letter is an essential document in business, assets, and share sales.
WHAT ARE THE TWO MAIN PURPOSES OF A DISCLOSURE LETTER?
Provision Of Information
A disclosure letter provides a buyer with the particulars pertaining to their ultimate decision on whether or not to follow through with the purchase. Such information will include the background of the transaction and, a lot of times, supplements other documents the purchaser has or will receive. The documents may include:
- Profit and loss statements;
- Key business contracts (lease and employment agreements);
- ASIC extracts.
Limitation Of Warranties
A disclosure letter is essential in minimizing the seller’s liability within the transaction. The letter can limit any warranties provided by the seller in the main sale contract. Examples of warranties that can be impacted by the disclosure are:
- Ownership shared through the company, as well as plans to issues options under an Employee Share Scheme;
- A contract outlining the role in which the business is a party that may impact the buyer;
- Obligations of employment and the entitlement for the existing staff to be employed;
- The loans owned by the company in which they are the guarantor; and
- The divulgence of any possible subsidiaries within the company if there are any
Keep in mind, the examples provided are what you would expect in a typical situation, and the disclosures made can vary in each circumstance.
What Form Should Be Used For A Disclosure Letter?
A disclosure letter typically follows the suit of that of a letter. It will be comprised of four main parts. You should also be aware that each transaction is different than the next, and the seller has the choice of which way a disclosure letter is drafted.
Disclosure Letter Introduction
An introduction of a disclosure letter will refine the letter’s purpose and aid in identifying the relevant sale agreement with all the parties involved. It may also supply all of the needed background information pertaining to the transaction and the terms in which need defining.
General Disclosures
General disclosures are usually standard disclosures that are/can be applied to any transaction. The attorneys hired by each party will generally ensure that all matters presented in the general disclosure do not repeat or overlap what has already been placed in the sale agreement. This is to prevent any inconsistency and to avoid any possible confusion.
Specific Disclosures
A specific disclosure is usually provided by the seller and is structured to the relevant transaction. This prevents inconsistencies between the disclosures in the letter and the warranties in the sale agreement. In addition, this keeps the seller from being able to say there was a breach at a later time.
Annexure
Occasionally a seller will want to refer to certain documents when specifying disclosures. Annexing helps with those documents, referred to as the disclosure bundle, within the disclosure letter. If this route is chosen, the seller is ensured that they have provided a sincere disclosure. This also creates awareness of all documents associated with the disclosure preventing disputes later. Once all parties involved, agree on finalizing the forms and letters, it is attached to the sale agreement. The letter is then signed by the seller and provided to the buyer.
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